Month: June 2014

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Recently updated key economic indicators shown below with commentary for each. As always, economic data is provided for informational purposes only, is not real-time, is subject to revision, and its accuracy cannot be guaranteed. Please do not trade or make other financial decisions based on this data.

When you receive a bonus from your employer, have restricted stock vest, have taxes collected on the cashless exercise of a stock option, or receive any other form of supplemental wages, you may have too much or too little tax withheld depending on your marginal tax bracket and the method your employer uses for tax withholding. On a normal (non-bonus paycheck), payroll withholding tables take the amount of taxable income you earn for the pay period and translate that to the amount of tax that should be withheld, using the marginal tax brackets for your filing status (from your W-4), the number of allowances you claim (from your W-4), and number of pay periods in a year. For example, if you claim “Single, with 0 allowances”, you earn $8k in a pay period, and you are paid bi-weekly (26 x per year), the withholding tables will determine the projected annual tax liability based on the Single tax brackets, $8,000 * 26 = $208,000 of projected taxable income for the year. Dividing by 26 gives the Federal withholding amount for the pay period.

From the example above, you should be able to see how wildly the withholding rate can vary if your paycheck varies from period to period, which is why it is so hard to accurately set your withholding and why you never seem to get the same refund or owe the same amount year after year. (Add in exemptions, deductions, and credits, and it gets even more difficult). If you receive bonus pay as part of your regular pay, your employer can combine the two and determine the withholding on that paycheck based on the extrapolated annual income if you earned that amount each pay period. In this case, your projected annual income and the withholding tax rate will be very high because 26 * your combined wage and bonus is a very large number. You’d therefore have more withholding than is necessary for the period and would accumulate that amount toward a tax refund when you file. The more typical scenario is that your bonus would be paid either as a separate paycheck, or as a separate line item on your regular paycheck but considered as supplemental wages. In both of these cases, a statutory 25% withholding rate is used for the supplemental wages. If your marginal tax bracket is actually higher than 25% (taxable income over about $90k as a single filer, or over $150k as a married couple), then you’d have less withholding than is necessary for the period. That would accumulate toward an amount you’d owe when you file your taxes. In an extreme example, let’s say that you earn $250k per year as a single filer (33% tax bracket), but that you have an windfall of an additional $250k (bonus, stock, whatever). That $250k windfall is taxed at 25% when it should be taxed at ~35%, meaning you’d stand to owe $25k in tax when you file for that tax year.

The moral of the story is to be careful whenever you receive a bonus (or earn some other form of supplemental income like vesting equity). If the following conditions exist, it may cause you owe a substantial amount of tax at the end of the year:

1) It is paid in a separate paycheck, as supplemental wages on your normal paycheck, or withheld automatically as part of an equity transaction

2) You earn more than $90k per year (single) or $150k per year married, including the bonus payment.

Note that the tax is the same whether it is appropriately withheld at the time of the bonus payment or if you pay it at the end of the year. The problem isn’t that you pay additional tax. The potential problem is that you may owe a lot of tax and may not have been prepared for it (e.g. you used the bonus for a downpayment on a house or to payoff debt, and don’t have the cash remaining to pay your tax). It’s always a good idea to keep 10-15% of your gross bonus tucked away to make sure you have it available for taxes if needed. If you need a more detailed estimate of the potential tax impact of a large bonus payment, contact your financial advisor.

A lot goes into figuring out what you want to be when you grow up. Money is far from everything, but it’s definitely a factor, especially if you know you’re going to be graduating with a substantial amount of student debt and need an income that will allow you to pay it back. For all the parents out there reading this, payscale.com ranks college majors by median starting salary and gives an indication of median mid-career salary as well (list included below for your reference). No surprise in that engineering, math, and science dominate the top of the list. Also on their site, you can find the Best Schools By Major, Best Schools By Region, advice on choosing a major, and a copious amount of other information. Check it out as just one more resource to help coach college bound seniors and younger children to make important choices that may determine their career, earning potential, and happiness in adulthood.

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The PWA (Perpetual Wealth Advisors) Financial Tastings Blog is intended to provide our clients and other interested readers with bite-sized, easily digestible information on personal finance topics. We used to publish a quarterly newsletter with similar information and will be archiving some of those topics here. Instead of continuing with a publication that was akin to a seven-course meal every three months, we have found that the fast-paced, mobile-driven world required smaller amounts of information, communicated more frequently. We've turned to the blogging concept to provide it. Topics will include both original content and links to other articles of interest. They will span key areas of personal finance including planning, goal setting, budgeting, cash flow management, debt management, risk management, employee benefits, tax, investments, retirement planning, and estate planning. We'll try to keep posts brief, simplify where possible, and answer as many questions as we can. Speaking of questions, feel free to send them to blog@perpetualwealthadvisors.com. We'll occasionally open up the mailbag for a Q&A post. Bon appetit!

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This web site is only for the purpose of giving general information and is not intended to offer personal financial advice. Nothing in these pages shall be construed as offering or disseminating specific financial, retirement, estate, asset protection, tax, or legal advice. We DO NOT offer any type of investment advice on-line. Nothing in this entire web site shall be construed as an offer to sell, or a solicitation to buy regulated securities. Nothing contained in this web site shall be implied or construed as creating a planner / client relationship by virtue of your access to this site and you should not rely on any information contained herein to plan your estate or invest any of your assets. You will only be considered a Perpetual Wealth Advisors client by mutual agreement and only after you have executed a client agreement and retained our services. Perpetual Wealth Advisors, L.L.C. is a Registered Investment Adviser under the laws of the states of North Carolina, Georgia, Minnesota, Texas, and California. Registration of an Investment Advisor does not imply any level of skill or training.